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Industry Compliance Accurate Revenues & Data Professionalism & Integrity
INDIAN VALUATION BASICS
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
AGENDA
• ONRR’s Trust Responsibility• Valuation Basics
• Lease Terms• Product Codes• ONRR Royalty Equation
• Indian Gas Valuation • Index-Zone Valuation• Dual Accounting• Non-Index-Zone Valuation (Major Portion)
• Oil Valuation 2
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
INDIAN TRUST RESPONSIBILITIES
The Federal Indian trust responsibility is a legally enforceable fiduciary obligation on the part of the United States to protect tribal treaty rights, lands, assets, and resources, as well as a duty to carry out the mandates of Federal law with respect to American Indian and Alaska Native tribes and villages.
3
In several cases discussing the trust responsibility, the Supreme Court has used language suggesting that it entails legal duties, moral obligations, and the fulfillment of understandings and expectations that have arisen over the entire course of the relationship between the United States and the federally-recognized tribes.
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
ONRR TRUSTRESPONSIBILITIES
Four agencies in the Department of the Interior share responsibility for the trust management and protection of Indian mineral interests.
4
The ONRR, in conjunction with BIA and OST, provides revenue management services for mineral leases on American Indian lands. Money collected for Indian mineral leases is returned 100%
to respective Indian tribes and individual Indian mineral owners.
Office of the Special Trustee for American Indians (OST)• How to receive funds from your IIM
account:• Direct Deposit• Debit Card• Check
• Privacy of your financial trust account
• Why it is important to update your address
• If funds in your account earn interest
• Trust Asset Information
You can call OST toll free at:1-888-678-6836
Website: www.doi.gov/ost
Bureau of Land Management (BLM)• Permit approvals to drill or
extract a mineral resource• What happens in an inspection• Frequency and results of onsite
inspections• Communitization review• Lease production volumes• Wells and other ownership that
may affect your production• Proper plugging of wells• Official surveys of Indian lands
For BLM questions, please visit their websiteWebsite: www.bia.gov
Bureau of Indian Affairs (BIA)• Land ownership and lease
status• Finalizing and approving
Communitization Agreements (CAs)
• Rights-of-way• Probate
For BIA questions, please contact the BIA agency or tribal office having responsibility for your mineral properties.Website: www.bia.gov
Office of Natural Resources Revenue (ONRR)• Your oil, gas, or solid
minerals royalty payments• How your royalties are
calculated• Auditing of mineral leases
You can call ONRR toll free at:Denver 1-800-982-3226Oklahoma 1-800-354-7015Farmington 1-800-238-2839Website: www.onrr.gov
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
THE TRUST RESPONSIBILITY &FIDUCIARY RELATIONSHIP
5
A fiduciary relationship exists
between the Federal
Government and Indian tribes which
requires…
Highest degree of
responsibility
Utmost loyalty
Advocate for tribes
Act in good faith
toward tribesSeek to make
tribal resources
productive and profitable
Put Tribal
Interest First
Provide Full Disclosure
Disclose All
Conflicts of Interest
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
CLICKER QUESTION!
How long have you been doing Indian related oil and gas royalty work?
A. 0-2 yearsB. 2-5 yearsC. 5-10 yearsD. More than 10 years
6
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
CLICKER QUESTION!
What is the starting point for all Indian royalty valuation?
A. The lease termsB. The regulationsC. None of the above
7
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
Key Indian Lease Terms
Secretarial Discretion (use ONRR’s regulations)– “’value’” for the purposes hereof may, in the
discretion of the Secretary, be calculated… Major Portion
– “’value’”… may … be calculated on the basis of the highest price paid or offered (whether calculated on the basis of short or actual volume) at the time of production for the major portion [of production]
Accounting for Comparison (Dual Accounting)– “… and that royalty will be computed on the value of
[wellhead] gas … or on the products thereof … , whichever is the greater.
8
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
VALUATION REGULATIONS
30 CFR Part 1202
• Indian Oil: §§ 1202.100 - 1202.101• Indian Gas: §§ 1202.550 - 1202.558
30 CFR Part 1206
• Indian Oil: §§ 1206.50 - 1206.65• Effective July 1, 2015
• Indian Gas: §§ 1206.170 - 1206.181• Effective January 1, 2000
Electronic Code of Federal Regulations: http://www.ecfr.gov/ 9
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
THE ROYALTY EQUATION ANDVALUATION BASICS
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
ONRR ROYALTY EQUATION
Royalty due = [volume x unit value x royalty rate] – [allowances x royalty rate]
11
Oil example:Volume sold = 100 bblUnit value = $45/bblRoyalty rate = 12.5%Allowable transportation cost = $1.00/bbl
Royalty Due = (100 bbl x $45/bbl x .125) - ($1/bbl x 100 bbl x .125)
Royalty Due = ($562.50) – ($12.50)
Royalty Due = $550.00
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
Lease 1
Lease 2
Lease 3
Inlet Separation
Gas Treating
Condensate Stabilization
DehydrationNGL
Extraction
NGLs(PC 07)
Residue Gas(PC 03)
orCoalbed Methane
(PC 39)
Inlet Scrubber Condensate
(PC 06)
FORM ONRR-2014 COMMON PRODUCT CODES
Production Transportation Processing
Pipeline Fuel(PC 15)
Drip Condensate(PC 05)
Oil (PC 61, 62, 63, 64, 65 )
Condensate (PC 02)
Unprocessed Gas (PC 04)
Coalbed Methane (PC 39)
12
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
VOLUME: THE BASIS FOR ROYALTY
13
BLM or BSEE-approved measurement point
Indian LeaseWell
Well
Royalty is due on the quantityand quality of production as measured at the Bureau of LandManagement (BLM)-approved royalty settlement point
Regs: 30 CFR §§ 1202.100, 1202.555, 1206.63, 1206.175
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
VOLUME: THE BASIS FOR ROYALTY
14
Oil reporting requirements
• Reported in barrels (42 gal)• 60 degrees F• Reported as clean barrels,
adjusted for basic sediment and water (BS&W)
Gas reporting requirements
• Report using Mcf and MMBtu• Adjust the Mcf to a pressure
base of 14.73 psi• Report using the dry heating
value, unless the water vapor content has been measured, then use the “real” or “actual” heating value
• Report natural gas liquids (NGLs) using gallons
Regs: 30 CFR Part 1202, §§ 1202.101, 1202.558
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
CLICKER QUESTION!
Is the following statement true or false?
For Indian valuation, concepts like gross proceeds or marketable condition don’t matter because value is always based on index-pricing.
A. TrueB. False
15
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
ARM’S LENGTH ORNON-ARM’S LENGTH?
Are the parties…• Affiliated?
• Does the entity control, is it controlled by, or is it under common control with another entity?
• Negotiating with opposing economic interests? • Factors outlined in Vastar
Resources, Inc. 167 IBLA 17 (2005)
• Related by blood or marriage?
160%
10%
50%
100%
Degree of Control
Non-arm’s-length
Consider additional
factors
Arm’s-length
Regs: 30 CFR § 1206.51, 1206.171
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
GROSS PROCEEDS
Gross proceeds means the total monies and other consideration accruing to an oil and gas lessee for the disposition of production.
17
You produce 25 MMBtu of gas from Indian land (not in an index-zone) that is adjacent to your back yard and sell it to your neighbor at arm’s length for:• $20• 5 chickens• 1 goat
Regs: 30 CFR § 1206.51, 171
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
CLICKER QUESTION!
18
What are your gross proceeds (“total monies and other consideration”)?
A. $20
B. $20 and the market value of the 5 chickens and 1 goat
C. Comparable arm’s-length sales
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
MARKETABLE CONDITION
Marketable condition means lease products which are sufficiently free from impurities and otherwise in a condition that they will be accepted by a purchaser under a sales contract typical for the field or area.
19
Oil• Separation• Gathering• Free of impurities
(BS&W limit)
Gas• Separation• Gathering• Compression• Dehydration• Sweetening
Regs: 30 CFR §§ 1206.55, 1206.171, 1206.174
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
MARKETABLE CONDITION
• Must place the production into marketable condition at no cost to the Indian lessor
• Cannot reduce royalties by transferring the costs to the purchaser for a lower sales value
• Gross proceeds should be increased to the extent they were reduced for costs associated with placing the production into marketable condition
• If the lessee meets or exceeds the marketable condition requirements, they may be able to deduct a portion of their costs
20Regs: 30 CFR §§ 1206.55, 1206.174, 1206.178(f)(9)
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
Unbundling
The burden rests on the lessee to determine allowed and disallowed costsUnbundling involves:
– Determining marketable condition for your gas– Separating transportation fees from processing
fees– Applying an ONRR-generated UCA, if applicable
21
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
Royalty due = [volume x unit value x royalty rate] – [allowances x royalty rate]
ALLOWANCES
22
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
Allowance Form/Contract Filing Requirements
23
Arm’s-Length Non-Arm’s-Length
• No forms required
• Must submit transportation and processing contracts and all subsequent amendment(s) within 2 months of claiming allowance
• Form ONRR-4110 Oil Transportation Allowance Report
• Form ONRR-4295 Gas Transportation Allowance Report
• Form ONRR-4109 Gas Processing Allowance Report
• Must submit actual cost data on allowance form within 3 months after the end of the allowance year or allowance period, whichever is sooner
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
ALLOWANCES
Transportation allowance means a deduction in determining royalty value for the reasonable, actual costs that the lessee incurs for moving:• Oil, gas, or gas plant products to the point of
sale or delivery off the lease, unit area, or communitized area
• When using an index-zone or major portion price, you should not take a transportation allowance
• The transportation allowance does not include gathering costs
24Regs: 30 CFR § 1206.51, 1206.171
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
GATHERING
Gathering means the movement of lease production to a central accumulation or treatment point on the lease, unit, or communitized area; or to a central accumulation or treatment point off of the lease, unit, or communitized area as approved by BLM operations personnel.
25Regs: 30 § CFR 1206.51, 1206.171
Indian Lease
BLM or BSEE-Approved Royalty Measurement Point
ONRR-Defined Gathering
Industry-Defined Gathering
ONRR-Defined Transportation
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
ALLOWANCES
Processing allowance means a deduction in determining royalty value for the reasonable, actual costs the lessee incurs for processing gas.
Processing means any process designed to remove elements or compounds (hydrocarbon and nonhydrocarbon) from gas, including absorption, adsorption, or refrigeration.
26Regs: 30 CFR § 1206.171
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
ALLOWANCES
• Allowances should not include any costs associated with marketing or placing the production into marketable condition
• Allowable costs should be allocated across all the products being transported/processed
• May not deduct costs for moving lease production that is not royalty bearing
• May not deduct costs incurred for moving anything other than Indian production
27
Arm’s-Length Non-Arm’s-Length
Based on contract charges Based on the lessee’s or their affiliate’s actual capital and operating costs
Regs: 30 CFR §§ 1206.56 - 58, 1206.177-178, 1206.179 - 181
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
ALLOWANCES
Allowance Limits• Limits based on the
royalty value of each product
• 50% transportation• 66 2/3% processing• For gas plant products,
the combination the of transportation and processing allowances cannot exceed 99% of the value of the product
28
0%
25%
50%
75%
100%
TransportationAllowance
ProcessingAllowance
Remaining Revenue PercentageAllowance
Regs: 30 §§ CFR 1206.177, 1206.179
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
INDIAN GAS VALUATION
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
GAS VALUATION
30
Gas
Unique Royalty
Lease Terms
Royalty Valued at the Secretary’s
Discretion
Index-Zone Valuation
Non-Index-Zone Valuation
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
INDEX-ZONE VALUATIONFLOW CHART
31
Refer to hand out
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
INDEX ZONES
32
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
INDEX-ZONE RESOURCES
• List of tribes and counties in each index zone:• See 64 Federal Register 66771 – November 30,
1999• https://www.onrr.gov/Laws_R_D/FRNotices/PDFDocs/66771.pdf
• List of index-price points used in each index-zone price calculation:• See 76 Federal Register 37828 – June 28, 2011• https://www.onrr.gov/Laws_R_D/FRNotices/PDFDocs/37828.pdf
33
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
INDEX-ZONE PRICES
34
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
Index Zone Valuation
The value of the gas (PCs 03, 04, 15, 39) is the index zone price unless:– You have an arm’s-length dedicated contract – You have to pay additional royalties under the
safety net provision– You are valuing non-hydrocarbon gas– The lease is not in an index zone– The lease terms require a different valuation
method35
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
DUAL ACCOUNTING
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
DUAL ACCOUNTING IS ACOMPARISON
Unprocessed Value Processed Value
37Regs: 30 CFR § 1206.171
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
DUAL ACCOUNTING
• Required by lease terms• Explained in the regulations
• Alternative dual accounting (30 CFR § 1206.173)• Actual dual accounting (30 CFR § 1206.176)
• Lessees must file the form ONRR-4410 to:• Certify if they are exempt (Part A)• Elect their dual accounting method (Part B)
38Regs: 30 CFR § § 1206.173, 1206.176
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
NON-INDEX ZONE VALUATION(MAJOR PORTION)
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
NON-INDEX-ZONEDESIGNATED AREAS
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Industry Compliance Accurate Revenues & Data Professionalism & Integrity
NON-INDEX-ZONE REPORTING
• Lessees initially report current month’s value based on 30 CFR § 1206.174(b) or (c) (arm’s-length or non-arm’s-length valuation)
• For wellhead sales of unprocessed gas, report product code 04 on Form ONRR-2014
• For sales of processed gas, report product code 03 (residue) and 07 (NGLs) less applicable allowances
• About 18 months after initial reporting, ONRR calculates the major portion price
41
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
MAJOR-PORTION REPORTINGADJUSTMENTS
• ONRR notifies lessees of the major portion values and due dates in the Federal Register and with an e-blast
• If the sales price was less than the major portion price, the lessee must increase their royalties
• If the sales price was higher than the major portion price, the lessee does not adjust down
• When using the major portion price, you should not take a transportation allowance.
42Regs: 30 CFR § 1206.174(a)(4)
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
MAJOR PORTION PRICES
43
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
INDIAN OIL VALUATION
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
INDIAN OIL TERMS
45
NYMEX CMA: NYMEX Calendar Month Average (CMA)• The average price of WTI crude for all trade days within a calendar month
Designated Area: An area ONRR identifies as unique based on both its location and crude type
• A location with two crude types would have two designated areas
LCTD: Location and Crude Type Differential• Adjusts NYMEX price to account for transportation costs and crude types
for each designated area
IBMP Price: Index-based major portion price• The NYMEX price, adjusted by the LCTD, that represents approximately
the 75% major portion for a designated areaRegs: 30 CFR § 1206.51
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
Indian Oil Major Portion Designated Areas
46
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
NEW REPORTINGREQUIREMENTS
47
Do NOT use product code “01” anymore. Instead, use one of the following:
(61) – Sweet Crude(62) – Sour Crude(63) - Asphaltic
(64) – Black Wax(65) – Yellow Wax(02) – Condensate*
*Condensate is not a new product code, however ONRR will calculate an IBMP price for condensate in each designated area where condensate is reported
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
SALES TYPE CODES
• Arm’s-Length TransactionsARMS
• Non-Arm’s-Length TransactionsNARM
• Royalty-In-Kind DeliveriesRIKD
• ONRR Index Based ValueOINX
Codes assigned as needed48
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
For each designated area, the value of oil for royalty purposes would be the higher of:
1) Gross proceeds (less transportation allowances) value
or
2) Index-Based Major Portion (IBMP) price
• NYMEX CMA adjusted for a designated area-specific Location and Crude Type Differential (LCTD)
• Plus/minus roll (for Oklahoma only)• The roll is defined at 30 CFR § 1206.51
49
OIL VALUE FOR ROYALTY
Regs: 30 CFR § 1206.52
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
IBMP PRICES
50
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
IMBP PRICES
51
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
DEAR REPORTER LETTER
52
Dear Reporter Letter May 15th, 2015http://onrr.gov/PDFDocs/20150515.pdf and
August 21, 2015 clarification http://www.onrr.gov/PDFDocs/20150821.pdf
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
EXAMPLES
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
Examples: IBMP Prices
54
Designated Area Product Codes
02 61 62 63 64 65
South Fort Berthold $ 37.07 $ 41.56 $36.89 $ $ $
Uintah & Ouray - Duchesne County
$ 39.55 $ $ $ $ 39.19 $
Use these prices for the next two examples:
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
EXAMPLE 1: ARM’S-LENGTHSALE OF 1000BBL
55
Sales Month July 2015 Sales Price $42.50/bbl
Crude Type Light Sweet Lease Location Ft. Berthold, S. of Missouri River
Transportation $5/bbl Royalty Rate 1/8 (.125)
Given:
Determine:Product Code Sales Type Code Gross Proceeds
less Transportation IBMP PriceSales ValueRoyalty Due:
61OINX
$37.50$41.561000 bbl * $41.56 = $41,560(1000 bbl * $41.56 * 0.125) = $5,195
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
EXAMPLE 1: REPORTING ONTHE 2014
56
Indian Oil Royalty Reporting
ProdCode
Sales Type Code
Sales Vol Sales Value
Roy Val BeforeAllowances
Transport Allowance
Roy Val After Allowances
61 OINX 1,000 bbl $41,560 $5,195 - $5,195
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
EXAMPLE 2: ARM’S-LENGTHSALE OF 1000BBL
57
Sales Month July 2015 Sales Price $45.00/bbl
Crude Type Black Wax Lease Location Uintah & Ouray, Duchesne County
Transportation $5/bbl Royalty Rate 1/8 (.125)
Given:
Determine:Product Code Sales Type Code Gross Proceeds
less Transportation IBMP PriceSales ValueRoyalty Due:
64ARMS
$40.00$39.191000 bbl * $45.00 = $45,000(1000 bbl * $45.00 * 0.125) – (1000 bbl * $5.00 * 0.125) = $5,000
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
EXAMPLE 2: REPORTING ONTHE 2014
58
Indian Oil Royalty Reporting
ProdCode
Sales Type Code
Sales Vol Sales Value
Roy Val BeforeAllowances
Transport Allowance
Roy Val After Allowances
64 ARMS 1,000 bbl $45,000 $5,625 $625 $5,000
Note: The transportation allowance should be reported separately, so we report the results from each of the parentheses on the previous slide and the total royalty due after allowances.
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
INDIAN OIL RULE CONTACTS
59
• Email Address: [email protected]
• Website: http://onrr.gov/Valuation/IndianOilIBMP.htm
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
QUESTIONS?
60
Industry Compliance Accurate Revenues & Data Professionalism & Integrity
Course Feedback
Was the content of this course:A. way too easy?B. a little too easy?C. just right?D. a little too challenging?E. way too challenging?
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